Explaining the Cross‐Section of Stock Returns in Japan: Factors or Characteristics?

Japanese stock returns are even more closely related to their book‐to‐market ratios than are their U.S. counterparts, and
thus provide a good setting for testing whether the return premia associated with these characteristics arise because the
characteristics are proxies for covariance with priced factors. Our tests, which replicate the Daniel and Titman (1997) tests
on a Japanese sample, reject the Fama and French (1993) three‐factor model, but fail to reject the characteristic model.